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STATEMENT

OF

KEVIN V. DI GREGORY
DEPUTY ASSISTANT ATTORNEY GENERAL
CRIMINAL DIVISION
UNITED STATES DEPARTMENT OF JUSTICE

BEFORE

THE SUBCOMMITTEE ON
COURTS AND INTELLECTUAL PROPERTY
COMMITTEE ON THE JUDICIARY
UNITED STATES HOUSE OF REPRESENTATIVES

CONCERNING

H.R. 2265 -- THE "NO ELECTRONIC THEFT (NET) ACT"

PRESENTED ON
SEPTEMBER 11, 1997

Mr. Chairman and members of the Subcommittee: Thank you for this opportunity to describe the Department of Justice's enforcement of the criminal laws protecting copyright, and to express the Department's strong support for the goals of H.R. 2265, the "No Electronic Theft (NET) Act." Intellectual property is one of this nation's most important resources, and with the help of Congress, the Department will ensure that theft of copyright is vigorously prosecuted as we move further into the digital age.

The advent of powerful and inexpensive computing is bringing many changes to the way that copyrighted works are being illegally distributed, and hence to the methods that law enforcement uses to combat copyright piracy. Traditionally, copyrighted works including books, records, and audiotapes have been illegally reproduced here or abroad in a factory. The pirated goods are sold to wholesalers, and then in turn to retailers, who sell the goods on the street. In this type of distribution scheme, the damage to copyright owners, while substantial, is subject to certain technological limits. That is because the equipment necessary to reproduce the works in bulk is relatively expensive to purchase, and second generation products (i.e., copies of copies) are either impossible for the customer to make (for records and compact disks), or else suffer in quality (for audio and video cassettes).

Another feature of this model of distribution is that the sale of goods on the street is highly visible, making it likely to attract the attention of law enforcement. Once the crime problem is targeted, the nature of the distribution scheme permits law enforcement to infiltrate the organization by obtaining the cooperation of the retailer to make a case against the wholesaler, and then use the cooperation of the wholesaler to make a case against the factory owner. By this process, an entire distribution scheme can be shut down, resulting in the seizure of a substantial number of illegally copied works.

This illegal distribution of copyrighted goods through tangible means continues to present a pressing problem for copyright owners, particularly for producers of books, movies, music, and computer software.1 Accordingly, law enforcement continues to concentrate a great deal of attention on investigating and prosecuting these copyright pirates. To an ever-increasing extent, however, copyright piracy is being carried out through computers. Anything capable of being digitized -- that is, reduced to a series of zeros and ones -- is capable of being transmitted easily from one computer to another. Pirates have used this capability of the computer to steal vast amounts of copyrighted material, and illegally transfer it to others.

Up to now, it has been computer software companies who have suffered the most at the hands of the pirates. As technology is permitting different types of works to be easily digitized and copied, other industries are being affected. For example, the music industry is now beginning to suffer serious losses from computer pirates. And within a few years, the movie industry will find its products vulnerable to computer theft.

Pirates who operate electronically are often organized in gangs. Many pirate organizations operate through "Bulletin Board Services," or BBS's: a computer or several computers often located in someone's home, and reachable by customers or subscribers through telephone lines and computer modems. Some of the BBS's offer pirated software called "warez" exclusively. Others offer legitimate services, such as discussion groups, or a platform for trading "shareware" (software not covered by copyright), and contain pirated material on parts of their BBS's accessible only through a password.

Some of these BBS's operate by selling memberships. Others operate on a trade or barter basis, requiring prospective members to contribute valuable software to the BBS. In either event, the member is permitted to access and copy copyrighted software from the BBS. These BBS's often offer hundreds of different programs, including expensive software from large and small companies, and may even include software in versions not yet available to the general public. The unauthorized distribution of valuable works by pirates has almost destroyed some software developers and seriously injured countless others.

Although distributing software through BBS's is the method of choice for present-day computer pirates, other computer network services are providing new means for copyright crime to occur. For example, there are certain electronic "chatrooms" devoted to the discussion of the availability of illegally copied programs. Programs can be sent through e-mail or, more typically, through World Wide Web sites or other programs that allow for the rapid exchange of digital information.

Pursuing copyright pirates who operate in cyberspace presents different challenges for copyright owners and for law enforcement than does combating the illegal physical distribution of copyrighted goods. First, unlike the equipment necessary to make large-scale physical copies of tapes and disks, computers than can easily copy digital information are relatively inexpensive. Second, with digital copies, there is no deterioration in quality when second or third generation copies are made. Accordingly, a copyrighted product can be placed on a BBS or website and copied by hundreds of people. Those people can then redistribute the copy to others, illegally spreading the product around the world in the space of a few minutes.

For law enforcement, electronic copyright violations are easy to overlook, because, rather than taking place openly in physical space, they take place hidden in cyberspace. Even when computer copyright violations are targeted, the lack of a hierarchical distribution scheme makes it difficult for a single case to make a noticeable impact on the amount of copyrighted material available through illegal channels: the software no longer available from one BBS can simply be found elsewhere. Finally, it is important to note that while the tangible distribution of copyrighted goods can be investigated by any law enforcement agent, computer violations require technically adept agents. These agents are in short supply, despite the efforts of federal law enforcement agencies to hire and train agents to deal with computer crime. Even when investigative agencies have such resources, they are often needed to investigate other computer crimes, such as attacks on the confidentiality, integrity and availability of computer systems and data.

Despite these formidable problems, the Department of Justice has made great strides toward addressing the difficulties associated with electronic theft of copyrighted products. We hope that by bringing the criminal laws to bear on some of the worst offenders, we will deter others from engaging in these illegal activities.

One of the most important initiatives that the Department has undertaken in this area is creating, in 1996, the Computer Crime and Intellectual Property Section (CCIPS) within the Criminal Division. As its name indicates, CCIPS is responsible for coordinating both the Department's policies regarding computer crime and the enforcement of criminal laws protecting intellectual property. CCIPS is headed by Scott Charney, a highly-regarded expert in these fields. The Section has particular expertise in the area this Subcommittee is considering today: computer-based copyright theft.

One of the Section's top priorities has been training federal investigators and prosecutors. In May of this year, CCIPS published a 175-page manual entitled, "Federal Prosecution of Violations of Intellectual Property Rights: Copyrights, Trademarks and Trade Secrets." The Manual has been provided to each of the 93 U.S. Attorney's Offices and is available on line.2 The Manual provides agents and prosecutors with a detailed resource for undertaking prosecutions in the law.

In addition, CCIPS works with a "Computer and Telecommunication Coordinator" (CTC) in each U.S. Attorney's Office. The CTC is a prosecutor specially designated by the U.S. Attorney as the expert in that district on high-tech crime, and is given specialized training in both computer crime and intellectual property protection.

CCIPS also provides training to state and local agents and prosecutors in a variety of settings. Finally, CCIPS is active in training law enforcement officials from other nations. Section attorneys have traveled to Russia, Egypt, and many other countries to give guidance to our counterparts there, and regularly instruct foreign officials visiting the United States on U.S. laws and techniques for combating copyright piracy. These efforts are particularly important to the United States because many of the products being illegally copied abroad are produced by U.S. companies, and because computers make it easy to send such pirated works across international boundaries.

CCIPS and U.S. Attorneys' Offices around the nation have also been investigating and prosecuting copyright cases with increasing frequency. The Department's enlarged focus on the issue has been matched by the investigative agencies assigned to this area: the Federal Bureau of Investigation and the U.S. Customs Service.

The FBI has made intellectual property protection one of its national crime priorities. Two of the notable operations that have recently arisen from the FBI's stepped-up enforcement efforts are "Operation Cyber Strike" and "Operation Counter Copy."

Operation Cyber Strike was an eight-month undercover investigation of pirate BBS's, run out of the FBI's International Computer Crime Squad in San Francisco. Earlier this year, search warrants were executed on ten large pirate BBS's around the country, receiving publicity from both the mainstream press and (perhaps more important for deterrence purposes) the pirate community. That investigation is continuing. Operation Counter Copy, while not focused exclusively on computer piracy, brought together a number of the FBI's cases involving criminal copyright and trademark cases. The operation resulted in thirty-five indictments in April, as well as eight guilty pleas.

The U.S. Customs Service is also actively involved in protecting against the illegal importation of infringing products, and seizes $45 million in such products annually. Recently, an undercover effort aimed at the importation of "bootleg" compact disks recorded without the permission of the recording artist resulted in a 39-count indictment and subsequent guilty pleas by fifteen defendants, as well as the seizure of 800,000 CD's worth over $20 million.

As we look toward the future, it is clear that the effort to deter electronic theft would be greatly aided by new legislation. The Department believes that H.R. 2265, the No Electronic Theft (NET) Act, contains a number of important provisions that will help the Department protect copyright in the digital age. We commend the sponsors of the bill,3 and strongly support legislation on this subject.

One of the key provisions of NET is the creation of a new criminal offense to cover the unauthorized distribution or reproduction of copyrighted materials, regardless of whether the distributor was trying to profit from the activity. The provision would cover a gap in the current criminal statute that was exposed by the District Court's dismissal of an indictment in United States v. LaMacchia, 871 F. Supp. 535 (D. Mass. 1994).

In LaMacchia, an MIT student operated a computer bulletin board system over the Internet that allowed anyone with a computer and modem to send to the board or acquire from the board copyrighted software programs. His actions caused an estimated loss to copyright holders of over $1 million during the six-week period the system was in operation. The student could not be charged with violation of the criminal law protecting copyright, 17 U.S.C.  506, because he was not acting "for commercial purpose or private financial gain," an element of the criminal copyright offense. Instead, he was charged with conspiracy to commit wire fraud, 18 U.S.C.  1343.

The district court dismissed the indictment, because it viewed the copyright law as the exclusive remedy for protecting intellectual property rights from this kind of theft, even while recognizing that the current copyright law fails to cover this conduct. The Court explicitly invited Congress to remedy this gap in the law:

    This is not, of course, to suggest that there is anything edifying about what LaMacchia is alleged to have done. If the indictment is to be believed, one might at best describe his actions as heedlessly irresponsible, and at worst as nihilistic, self-indulgent, and lacking in any fundamental sense of values. Criminal as well as civil penalties should probably attach to willful, multiple infringements of copyrighted software even absent a commercial motive on the part of the infringer. One can envision ways that the copyright law could be modified to permit such prosecution. But, "[i]t is the legislature, not the Court which is to define a crime, and ordain its punishment." [citation omitted].
871 F. Supp. at 545.

The LaMacchia decision has impeded the Department's ability to prosecute copyright pirates in instances where clear proof of a profit motive has been lacking. NET would fix this statutory hole by creating a new provision, to be codified at 17 U.S.C.  506(a)(2), which would criminalize willful infringement, even when there is no profit motive, and establish a three-year felony for reproducing or distributing, during any 180-day period, ten or more copies of one or more copyrighted works which have a total retail value of more than $5,000.

We do have some concerns that H.R. 2265 may sweep too broadly.4 These concerns are easily remedied, however, and we are confident that we will be able to work with the Subcommittee to fine tune this particular provision.

Filling the gap caused by the LaMacchia decision is only one of the benefits that this bill brings to criminal enforcement of the copyright laws. The bill has a number of other important provisions. They include:

In short, NET would give law enforcement the statutory tools we need to combat copyright crime. We look forward to working with the Subcommittee on this important matter.

I would be pleased at this time to answer any questions you may have.

1 Machines capable of copying software onto compact discs now retail for approximately $600; these machines are often used to transfer thousands of dollars of illegally copied software programs onto a single disk, which is sold to the user for about $20.

2 The Manual can be found on the Computer Crime Section's Web page, http//www.usdoj.gov/criminal/cybercrime.

3 We similarly commend Senators Leahy and Kyl, the sponsors of a similar bill in the Senate. That bill is S. 1044, and is called the Criminal Copyright Improvement Act of 1997.

4 H.R. 2265 permits misdemeanor penalties to be imposed for willful infringement by reproducing or distributing one or more copies of one or more copyrighted works, regardless of their retail value. The bill prescribes three-year felony penalties for reproducing or distributing, during any 180-day period, 10 or more copies of one or more copyrighted works, which have total retail value of more than $5,000.

S. 1044, by contrast, imposes a misdemeanor criminal penalty for non-commercial willful infringement only if ten or more copies of one or more copyrighted works are reproduced or distributed during any 180-day period and if the total retail value of the works or copies is $5,000 or more. Felony penalties would become available in non-commercial cases if the total retail value of the copied works exceeded $10,000.

5 We would be happy to work with the Subcommittee to formulate language to ensure coverage of pirates who provide copyrighted products with the expectation of receiving anything of value, even if they have not yet received that thing of value.

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Updated page October 20 , 1997
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